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How and When to Report Tips for Tax Purposes

One of the best things about working in the service industry is the tips. Whether it comes from food, hospitality, or a similar industry, the satisfaction of tucking away money is far greater than the traditional paycheck. After earning cash, you store it away on the spot without the government knowing how much you earned.

However, the IRS still considers tips as taxable income. Tip earners must remit Uncle Sam’s share of their income after reporting their tips. While traditional wages are automatically withheld, those who earn tips must calculate and withhold their taxes. Continue reading to learn how and when the tax process for tips works, and if you need tax help, Bronx Tax Services is here to help. 

a jar full of tips for report tip tax in & near Bronx, NY

What Counts as a Tip?

There are many types of tips. In addition to cash tips, non-cash items such as sports tickets or gift cards can also be considered.

Anything received with a value that is:

  • Not compulsory
  • Discretionary
  • Not required by company policy, or
  • Based on the customer receiving the payment

is considered a tip.

A tip is basically when a customer has the option of leaving money and deciding whom to leave it to.

Additionally, any money shared with other employees is a tip. The amount you share with the bartender or the busser, for example, is considered a tip to them.

Tip pools are considered tips if money is distributed indirectly to tipped employees.


Are Service Charges Considered Tips?

It’s important to distinguish between a tip and a service charge.

A service charge is a mandatory charge set by the company. Bottle service fees, room service fees, delivery fees, and large party surcharges fall into this category. In these instances, the business is mandated to collect and distribute the charges to the employees.

Even though service charges are taxable wages, you won’t have to keep track of them like you do tips. Your employer will do that for you. When your employer provides your IRS Form W-2, your portion of the service charge is listed in Box 1.


How Are Tips Taxed?

You are taxed on tips just like you are on an hourly wage or annual salary. Tips are subject to federal income tax, Medicare tax, and Social Security tax. Your tips will also be taxed by your state if you live in one with an income tax.

Your tip income will need to be reported on your tax return. This includes any tips you do not report to your employer, including non-cash tips.

Form 4137, Social Security and Medicare Tax on your Unreported Tip Income, must be completed for unreported tip income and attached to your tax return. To enjoy a smooth experience and avoid facing any issues, get help from tax professionals. 

a hundred dollar cash for tips on table in & Near Bronx, NY



How To Report Tips Tax

The IRS requires that tip-receiving employees notify their employers of all tips received. Keep a daily record of your tips, notify your employer in writing, and report all tips on your tax return.

To keep track of tips you receive, consider using IRS Publication 1244, which contains Forms 4070A and 4070. When tax season comes, you will have a record of your tip income to provide to your employer and the IRS.


Reporting to Your Employer

You must report tips to your employer by the 10th day of the following month for which you received the funds. Therefore, if you received $500 in tips in October, you must report that amount by November 10. If the 10th is a Saturday, Sunday, or a holiday, the employee must submit their tip report by the next business day. Since April 10 is a Sunday, the deadline for tips for March 2022 is April 11, 2022.

Reporting tips do not have a set format, but they must include basic information such as name, Social Security number, your address, signature, and the total amount of tips received.

If the statement covers a period longer than one month, you may be required to report tips more than once per month.

Your employer’s responsibility is to calculate and pay the employer’s portion of Social Security and Medicare taxes. Another reason to keep accurate tip records is that your employer determines your tax burden based on your tip records.


Reporting to the IRS

As a tip-receiving employee, you must report the total tips received for the entire year on your Form 1040 when you file your taxes. If you did not report any other tips to your employer over the year, you would add the amount in box 1 together with any other tips you received. If you fail to report tip income to your employer for one month because it was under $20, you must report your income to the IRS.

Unreported tip income also includes allocated tips, which an employer assigns to you in addition to the tips you report. You can report these tips using IRS Form 4137. If you have an amount included in box 8, “Allocated Tips,” of your W-2 statement4, you must file Form 4137 with your return. SCL tax services in & near Bronx, NY, has been helping small businesses with accounting, bookkeeping, and taxes. To get the tax help you need, contact our tax office, and one of our tax professionals will assist you.

Only in certain circumstances is your employer required to allocate tips. These include if you work in a restaurant or a food or beverage business, receive tips regularly, and report receiving tips that were less than 8% of the business’ food and beverage sales.


What Happens If I Don’t Report My Tips?

If you fail to report your tips properly to the IRS and your employer, you may be subject to various penalties and fines. IRS audits have been known to involve both individuals and businesses. The IRS holds the food and hospitality industries accountable for accurately calculating and reporting their tip income.

In the event the IRS discovers that you did not report your tip income correctly, they can charge you a penalty equal to 50% of the Medicare, Social Security, and federal income tax due on the tip income.

Failing to report your earnings accurately may also affect your Social Security benefits upon retirement. The Social Security Administration needs an accurate record of your earnings to access your benefits. Contact the Social Security Administration if you failed to report your taxable income accurately.


The Takeaway

Record your tip earnings carefully and regularly inform your employer about your tip earnings. In this way, you will be able to report your income on your tax return at year-end properly and be protected in case of an audit. The best way to make sure that you don’t face any issues with the IRS is to work with experienced tax professionals. SCL Tax Services In & Near Bronx, NY, is ready to help. We will take care of all your tax needs with our full-service approach. Contact our tax office, give us a call at +1-347-305-4348 , and let us handle your taxes.


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